The Deficit and Our Children: Just the Facts

This is deficit-fest week with President Obama’s deficit commission scheduled to have their big public kickoff on Tuesday, followed by an all-day affair sponsored by the Peter G. Peterson Institute the next day. If the deficit hawks succeed, everyone should be really really scared about the deficit by the end of the week and just dying to cut Social Security and Medicare for the sake of our grandchildren.

While there will be many facts about the debt and deficit tossed out at these gala events, there are some important tidbits of information that are likely to go unmentioned. So, courtesy of billionaire investment banker Peter G. Peterson (not) we bring these facts to you here.

Under any plausible set of projections, our children and grandchildren will enjoy far higher standards of living than we do today. On average, real hourly compensation is projected to rise by at least 1.2 percent a year. This means that workers in the year 2040 will enjoy compensation levels that on average are more than 40 percent higher than what workers receive today. This means that even if they paid hugely higher taxes, our children and grandchildren will have far more after-tax income than we do today.

There is a problem of inequality so that most workers may not share in this income growth. Due to the growth of inequality, most workers have seen little improvement in living standards over the last three decades. If the trend towards growing inequality continues, then workers in 2040 may not be much better off than workers today, but that is an issue of intra-generational inequality, not inter-generational inequality. Fixing inequality would cause us to focus on issues like trade policy, the ability of workers to join unions and taxpayer subsidies to the financial sector, not budget deficit.

The reason that the country is projected to face enormous deficits in the future is our broken health care system. We pay more than twice as much per person for our health care as people in Canada, Germany and other wealthy countries. This gap is projected to grow even larger in future decades. We have little obvious benefit from this additional spending, since people in all these countries have longer life expectancies than we do. If our per person health care costs were comparable to those in other countries then our budget projections would show huge surpluses, not deficits.

The debt to China has nothing to do with the budget deficit and does not present the disastrous risks claimed by the deficit hawks. The United States borrows money from China because of the trade deficit. The budget deficit is beside the point. If we had the same level of GDP and the same value of the dollar against the Chinese yuan, we would have just as large a trade deficit with China today even if the budget were balanced.

If we are concerned about borrowings from China, then we should focus on reducing the value of the dollar, not the budget deficit. If we didn’t have a budget deficit, China could be offsetting its trade surplus by buying private assets like shares of General Electric stock or bonds issued by private corporations. Of course, if China wanted to acquire government bonds it could sell these other assets and buy government bonds any day of the week. So, there is no special reason for anyone to be concerned about China owning U.S. government bonds as opposed to any other U.S. financial asset.

Finally, the scare story, that China might one day dump its bonds and send the dollar tumbling, is absurd on its face. Both the Bush and Obama administrations were pressuring the Chinese to raise the value of its currency. Are we worried that one day they will dump their huge holdings of dollars and send the yuan soaring against the dollar? In other words, the deficit hawks want us to be worried that the Chinese government will one day do exactly what we have been asking them to do for years: stop buying up dollars to depress the value of the yuan against the dollar.

The country faces real problems. In the short-term we face the problem of re-employing people in an economy with near double-digit unemployment. In the longer term we need to rebuild the economy on a cleaner more energy efficient path. And, we desperately need to fix our health care system. How we deal with these problems will determine the well being of our children and grandchildren.

Unfortunately, the deficit hawks diverted discussion from the housing bubble when it was growing to ever more dangerous levels. It is unfortunate that even now they can still use their money and power to prevent the country from focusing on the real dangers to the country’s future.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.